Question 1

Which of the following is an example of a real wage?

Accepted Answer

Real wages are adjusted for inflation, reflecting purchasing power. "$2400 per month (using 1990 prices)" indicates adjustment for inflation, making it a real wage.

Question 2

The most famous monetarist is:

Accepted Answer

Milton Friedman is considered the most famous monetarist as he developed and popularized the monetarist school of thought, which emphasizes the role of money supply and its impact on economic activity. He was also awarded the Nobel Memorial Prize in Economic Sciences in 1976 for his contributions to the field of economics. Alan Greenspan is a famous economist and former chairman of the Federal Reserve, but he is not primarily associated with the monetarist school of thought. Adam Smith is considered the father of economics and is known for his ideas on free markets and specialization. John Maynard Keynes developed the Keynesian school of thought, which emphasizes the role of government intervention in stabilizing the economy.

Question 3

Hyperinflation occurs because of:

Accepted Answer

Hyperinflation occurs when there is an excessive growth in the money supply, leading to a decrease in the purchasing power of the currency. This may occur due to government printing more money to finance its expenditures, leading to an increase in the overall supply of money.

Question 4

The reason why individuals have more money demand when their inflation expectations increase is because:

Accepted Answer

When individuals' inflation expectations increase, they believe that prices will be higher in the future. This means that they will need more money to be able to buy the same goods and services as before, hence increasing their money demand. Option A is incorrect because finding another job is not a direct solution to inflation. Option C is incorrect because a higher wage may not necessarily lead to an increase in the individual's purchasing power. Option D is incorrect because needing less money in their pockets when prices go up would mean that individuals' consumption levels have decreased, which is opposite of what is expected during inflation.

Question 5

Recall Application 2, "Increased Political Independence for the Bank of England Lowered Inflation Expectations," to
answer the following questions:
-According to the application, if the bonds that were not adjusted for inflation and the inflation adjusted bonds had the same yield, then:

Accepted Answer

If the yields on inflation-adjusted bonds and non-inflation-adjusted bonds are the same, it implies that people expect zero inflation, as there is no additional yield required to compensate for inflation.

Question 6

INFLATION-INDEXED BONDS IN THE UNITED STATES
Are there bonds that can protect your investments from inflation?
In 1997, the U.S. Department of the Treasury created a new financial instrument called the Treasury Inflation-Protected
Security, or TIPS. The key feature of TIPS is that the payments to investors adjust automatically to compensate for the actual
changes in the Consumer Price Index. Therefore, TIPS provide protection to investors from inflation.
Like other government bonds, TIPS make interest payments every six months and a payment of the original principal when
the bond matures. However, unlike other Treasury bonds, these payments are automatically adjusted for changes in inflation.
Despite their obvious attractions, the market for TIPS is still rather small. As of 2005, there were about $200 billion in TIPS
outstanding, compared to a total volume of about $4 trillion ($4,000 billion) total Treasury obligations. Because TIPS
compensate for actual inflation, the interest rate on these bonds differs from conventional bonds by the expected inflation
rate. By comparing the interest rates on TIPS to other government bonds of similar maturity, economists can estimate the
public’s expectations of inflation.
SOURCE: Simon Kwan, "Inflation Expectations: How the Market Speaks," Federal Reserve Bank of San Francisco Economic
Letter, October 7, 2005.
-According to the application, an investor would find TIPS most advantageous if:

Accepted Answer

TIPS provide the most advantageous protection to investors against large fluctuations in the inflation rate. This is because the payments to investors adjust automatically to compensate for the actual changes in the Consumer Price Index, which is a measure of inflation. Therefore, if inflation rates are constantly changing, TIPS can help protect investments from losing value due to inflation.

Question 7

According to the quantity equation, an increase in the velocity of money, all else fixed, will tend to cause:

Accepted Answer

The quantity equation states that MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is real GDP. Holding M, P, and Y constant, an increase in V will cause an increase in nominal GDP (PY). Therefore, the correct choice is C - an increase in nominal GDP.

Question 8

Figure 16.1
-Refer to Figure 16.1 to answer this question. Suppose the economy is initially at Point A. Labor leaders will only choose to demand a wage increase if:

Accepted Answer

Labor leaders will demand a wage increase if they believe inflation will persist, which is more likely if the Fed does not credibly commit to fighting inflation.

Question 9

The wage rate that is adjusted for changes in the price level over time is called the:

Accepted Answer

The real wage rate takes into account inflation and adjusts the wage rate for changes in the price level over time. This means that the real wage rate reflects the purchasing power of a worker's wages, rather than just the nominal amount they receive. A) Money wage rate is simply the amount of money a worker receives for their labor, without taking inflation into account. B) Nominal wage rate is the wage rate expressed in current dollars, without adjusting for changes in the price level over time. D) Expected future wage rate refers to the expected wage rate a worker will receive in the future, without taking inflation into account.

Question 10

The quantity equation can be written as:

Accepted Answer

The quantity equation, also known as the equation of exchange, states that the money supply (M) multiplied by its velocity (V) equals the price level (P) multiplied by real output (Y). Mathematically, this can be written as MV = PY. So, choice C is the correct representation of the quantity equation. Choices A, B, and D are not accurate expressions of the equation of exchange.

Question 11

Recall Application 3, "Hyperinflation in Zimbabwe," to answer the following questions:
-Using what you learned from the quantity theory of money, what is the main cause for the hyperinflation in Zimbabwe?

Accepted Answer

The quantity theory of money states that inflation is caused by an increase in the money supply relative to the quantity of goods and services in an economy. Zimbabwe experienced hyperinflation primarily due to the government's decision to print more money to finance its budget deficits and to pay off foreign debt. This led to a rapid increase in the money supply, driving up prices and causing hyperinflation.

Question 12

Suppose that the government collects $500 in taxes and borrows $1000 from the public. If the government prints $200 in new money to finance its budget deficit, how large is the government deficit?

Accepted Answer

The government deficit is the difference between government spending and government revenue. In this case, the government spends $1500 ($500 in taxes + $1000 in borrowing + $200 in new money). The government's revenue is $500 in taxes. Therefore, the government deficit is $1500 - $500 = $1000.

Question 13

Jim's nominal wage increased by 3%, and the prices of goods that Jim buys increased by 2%. Jim's real wage has:

Accepted Answer

Jim's real wage has increased because his nominal wage increased by 3%, while the prices of goods increased by only 2%, resulting in a net increase in his purchasing power.

Question 14

The velocity of money is 3. If nominal GDP is $1,500 billion then the money supply is:

Accepted Answer

The velocity of money (V) is calculated as V = Nominal GDP / Money Supply. Given V = 3 and Nominal GDP = $1,500 billion, the Money Supply = $1,500 billion / 3 = $500 billion.

Question 15

Recall Application 1, "Shifts in the Natural Rate of Unemployment" to answer the following questions:
-According to the application, the observed Beveridge Curve relationship shifts when:

Accepted Answer

The observed Beveridge Curve relationship shifts when the technology used in matching worker and jobs improves, meaning that the curve shifts inward (towards the origin) due to increased efficiency in job matching. The other choices are not mentioned as factors that would shift the Beveridge Curve relationship in this application.

Question 16

Recall Application 1, "Shifts in the Natural Rate of Unemployment" to answer the following questions:
-According to the application, William Dickens estimated that the natural rate of unemployment since the 1990s has been:

Accepted Answer

According to the application, William Dickens estimated that the natural rate of unemployment since the 1990s has been constant.

Question 17

Figure 16.1
-Refer to Figure 16.1 to answer this question. Suppose the economy is initially at Point A. If labor leaders successfully negotiate a wage increase and the Fed does nothing, then the economy will experience a/n

Accepted Answer

A wage increase typically raises production costs, leading to higher prices (inflation). If the Fed does nothing, the higher costs can reduce aggregate supply, potentially causing a recession.

Question 18

If the economy is at potential output, and people's expectations about inflation is correct, then the actual inflation:

Accepted Answer

If the economy is at potential output, it means that the economy is producing at its maximum capacity with full employment. If people's expectations about inflation are correct, then the actual inflation should be equal to the expected inflation. This is because the economy is not experiencing any supply-side shocks that would cause the actual inflation to deviate from the expected inflation. Therefore, the correct answer is A) equals expected inflation.

Question 19

The Phillips curve was first discovered by _______ while the expectations Phillips was first observed by _______.

Accepted Answer

A.W. Phillips discovered the original inverse relationship between unemployment and inflation in the 1950s, while Samuelson and Solow later developed the expectations-augmented Phillips curve in the 1960s.

Question 20

If prices increase by 4 percent and wages increase by 4 percent, the:

Accepted Answer

When both prices and wages increase by the same percentage, the real wage (purchasing power of wages) remains unchanged. Only the nominal wage (money wage) increases.

Quiz 16: The Dynamics of Inflation and Unemployment

Which of the following is an example of a real wage?

The most famous monetarist is:

Hyperinflation occurs because of:

The reason why individuals have more money demand when their inflation expectations increase is because:

Recall Application 2, "Increased Political Independence for the Bank of England Lowered Inflation Expectations," to answer the following questions: -According to the application, if the bonds that were not adjusted for inflation and the inflation adjusted bonds had the same yield, then:

According to the quantity equation, an increase in the velocity of money, all else fixed, will tend to cause:

Figure 16.1 -Refer to Figure 16.1 to answer this question. Suppose the economy is initially at Point A. Labor leaders will only choose to demand a wage increase if:

The wage rate that is adjusted for changes in the price level over time is called the:

The quantity equation can be written as:

Recall Application 3, "Hyperinflation in Zimbabwe," to answer the following questions: -Using what you learned from the quantity theory of money, what is the main cause for the hyperinflation in Zimbabwe?

Suppose that the government collects $500 in taxes and borrows $1000 from the public. If the government prints $200 in new money to finance its budget deficit, how large is the government deficit?

Jim's nominal wage increased by 3%, and the prices of goods that Jim buys increased by 2%. Jim's real wage has:

The velocity of money is 3. If nominal GDP is $1,500 billion then the money supply is:

Recall Application 1, "Shifts in the Natural Rate of Unemployment" to answer the following questions: -According to the application, the observed Beveridge Curve relationship shifts when:

Recall Application 1, "Shifts in the Natural Rate of Unemployment" to answer the following questions: -According to the application, William Dickens estimated that the natural rate of unemployment since the 1990s has been:

Figure 16.1 -Refer to Figure 16.1 to answer this question. Suppose the economy is initially at Point A. If labor leaders successfully negotiate a wage increase and the Fed does nothing, then the economy will experience a/n

If the economy is at potential output, and people's expectations about inflation is correct, then the actual inflation:

The Phillips curve was first discovered by _ while the expectations Phillips was first observed by _.

If prices increase by 4 percent and wages increase by 4 percent, the: